Prestige Consumer Healthcare Inc. Q4 2023 Earnings Call
Good day and thank you for standing by welcome to the proceeds consumer health care physical 20th 23 earnings call.
Time, all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star one one on your telephone you'll then here an automated message advising you. Your hand is raised to withdraw your question. Please press star one one again.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today still Triple Lily Vice President of Investor Relations and Treasury. Please go ahead.
Thanks, operator, and thank you to everyone who has joined today on the call with me around Lombardi, our chairman President and CEO and Christy cycle are cfl's.
And today's call review, our fourth quarter of the fiscal twenty-three results discuss our full year outlook for physical 24, and then take questions from Alice.
A slide presentation that accompanies today's call.
By visiting procedure consumer health care Dot com clicking on the investors links and then on today's webcast and presentation.
Remember some of the information contained in the presentation. Today includes 90 <unk> financial measures reconciliation. The nearest GAAP financial measures are included in our earnings release and slide presentation.
And today's call manager will make forward looking statements around risks and uncertainties, which are detailed in a complete safe harbor disclosure on page two of the slide presentation that accompanies the call.
These are important to review and contemplate does.
Does this environment uncertainty remains heightened you to supply chain constraints high inflation in various geopolitical factors, which have numerous potential impacts.
It means resolved can change it anytime in the forecasted impact of risk considerations. The best estimate based on the information available as of today's date.
Further information concerning risk factors and cautionary statements are available on our most recent SEC filings and most recent company 10-K.
Ah not hand, it over to our CEO round Lombardi right.
Think so let's begin on five five.
We're very pleased with our record physical twenty-three results that delivered strong growth. Thanks to our diversified portfolio of brands that consumers Nowhere Trust.
Revenues of 1.128 billion for the full year group, 3.5% organically.
This was set against a record physical 22 that grew over 10%.
As well as the backdrop of challenging macro environment.
Base business trends were strong across the majority of our portfolio.
By our longterm brand building efforts and solid consumer demand.
For the year or international segment experienced outside's growth as well as the cough and cold and G. I categories in North America led by losers Chloraseptic and Dramamine.
Many of these categories have declined meaning for just a few years ago at the start of Covid and a researcher as well as our strong overall performance over the last few years.
Testament to the benefits of the diversity of our portfolio will talk about this in further detail later on.
Are strong sales continued to translate to solid profitability.
For the year regenerated adjusted EPS of $4.21 and free cash flow of over $220 million.
We remain focused on delevering overtime, and achieved a year and leverage ratio of $3 three times, even after $50 million in share repurchases and significant inventory investments during the year.
We are set up to continue this longterm leverage reduction in physical twenty-four while retaining flexibility first of all discuss this further later on.
Yeah, let's turn to slide six.
A record fiscal twenty-three performance driven by strong 3.5% organic growth.
Is underpinned by our proven value creation strategy that's shown here.
By executing this disciplined strategy over time, it's resulted in a resilient business model that continues to deliver value not just in physical twenty-three, but over the long term.
First we.
We use our proven marketing strategies to leverage our leading portfolio of brands.
Using consumer insights, we drive efficient marketing channel development and innovation that are the cornerstones to our success.
Second the.
The business model, we operate Leverages are leading financial profile to enable robust free cash flow.
And third the model uses the first two points to enable strategic capital allocation Optionality that further amplify shareholder returns.
Our ability to use cash flow is both effectively and efficiently through disciplined capital deployment creates value.
The result of this execution is clear and our financial performance.
We've had a successful multi year compound annual growth rate over the last three years. This concludes organic growth above our long term target of 2% to 3% as well as double digit earnings growth.
The performance is especially noteworthy against the backdrop of COVID-19 variance supply chain challenges and inflation.
By executing these strategic value creation strategies, we continued to position our business for long term success and value creation.
So with that let's turn to the next section and review how we've driven this growth in more detail.
Friday is a reminder of our distinct portfolio attribute that sets us up for success.
The efficient deployment of capital and investments in our branch is both diversified portfolio into medi categories and enabled leading market shares for the majority of our brands.
First on the left side of the page is the diversity of the portfolio that is further subdivided by consumer ailments.
With a diverse portfolio of brands across many categories, we are nimble and identifying opportunities for investment.
We are also able to better mute the impact of any short term category changes.
Second the right of the page shows many of our leading brands, which are subsegments within these platforms.
Our sales most often come from number one brands and brands with long consumer Heritage's, which enables us to focus on brand building using our category leadership and proven brand building tactics.
Both of these business attribute are foundational to our success.
Let's turn to slide nine.
Here, we can see the benefits of category diversity.
Over the last three years.
Update and volatile environment led to a host of factors to navigate including changes to consumers habits supply chain and inflationary challenges.
With this backdrop anyone category may face short term challenges and fluctuations, but the power of a diverse portfolio allows us to be positioned for consistent overall long term growth.
For example, the Summer's Eve on the Gulf format of products or impacted over the last few years as consumer habits shifted at the start of COVID-19.
Although this doesn't change our ability to grow the branch and category long term and we anticipate growth again that physical 24. It was a factor in our women's health performance over the last three years.
Our diversity offsets these pressures are.
Three categories shown on the page pioneer care skincare and G. I R. Embodiment of this as key contributors to growth over the last three years.
And I am ear care, we've had success using a wide variety of tactics across clear eyes, and thera tears the launch of clear ice sensitive leveraged consumer insights, which captured incremental consumers, who believe they have sensitive eyes.
And skin care games had been fueled by our compound W brand, which continues to expand it's number one share with consumers by offering a broad product assortment that appeals to a range of people who suffer from words.
Marketing efforts have emphasized this an AD placements crossed digital and other formats.
Lastly, and GI we've experienced solid growth in both our Dramamine and Hydrolyte franchises.
Or dramamine, we've successfully leveraged the brand's heritage and motion sickness and to nausea, where we are now with the number one brand in the category for.
Hydrolyte, we continue to chip away at the brands longterm opportunity expanding with consumers across their hydration needs for everyday health in areas, such as travel sports and exercise.
In summary, the benefits of category diversity are clear by Opportunistically investing in growth in each of these categories. We've helped fuel solid organic growth over the last three years for the total company.
Now, let's turn to slide 10.
A reminder of our brand building tactics.
Are numerous brand building strategies shown here on the page focus around driving longterm category growth.
Each are executed based on opportunities identified from consumer insights that are specific to each brand.
We continue to operate with leading established brands that are well positioned to leverage these tactics for long term growth.
The end goal is long term success across channels and growth of the categories to which we are stewards.
To start we leverage learnings from consumer insights to identify where opportunities are there.
And providing consumers solutions that solved identified issues.
Next we remain agile marketers investing in tightly messaging to raise awareness of product efficacy and brand knowledge around the proven consumer solutions we offer.
We also operate with a multiyear new product development pipeline to ensure we continue to match the needs of consumers.
And last week.
We use the ability to align our investments and product offerings with channels that are important to consumers, including fast growing channels like E Commerce.
This broad distribution strategy helps underpin the marketing tactics just discussed.
In summary, each of these key marketing strategies play a valuable role in our success. They reinforce a longterm organic growth objective, 2% to 3% annually, which we continue to feel good about delivery.
With that I'll turn it over to Chris for a review of financials and an update on capital deployment.
Thanks, Ron good morning, everyone.
I'll start by reviewing our fourth quarter and fiscal twenty-three financial results and talk about our business attribute and results in cash flow that had driven rapid deleveraging and capital allocation optionality.
As a reminder of the information in today's presentation include certain non-GAAP information that is reconciled to the closest gap measure our earnings release much.
Let's turn to slide 13 can begin with fourth quarter results.
Q for fiscal twenty-three revenue of $285.9 million increased 7.1% and 8% on an organic basis versus the prior year.
The growth was approximately split between international in North American segments.
North America revenues were up 4% the largest growth category in dollar terms with skincare, where we experienced growth across brands, including compound W, who drove but paced and next.
The International segment increased approximately 33 per cent in queue for after excluding the effects of foreign currency.
This captain impressive year with the segment growing over 30% on a full year basis.
The record performance benefited from favorable consumer trends in many of our categories previously impacted by COVID-19, and continued strong sales for the Hydrolyte brand.
Despite difficult comparisons we anticipate further growth for the international segment and physical 24.
Adjusted EBITDA increased approximately 14% in queue for an EBIT margin remain consistent in the mid thirties.
Adjusted diluted earnings per share for the quarter was one dollar and seven up.
18% versus the prior year with higher sales being the largest driver.
Let's turn to slide 13 for more detail around consolidated results for the full year.
Record revenues of $113 billion for the full year fiscal twenty-three increased 3.8% versus the prior year and 3.5% I'm an organic basis.
Are broad and diverse portfolio enabled this result, with strong revenue growth and cough and cold Gi and our international segment more than offsetting of dynamics supply chain landscape by.
By channel, we continue to experience solid consumption growth and e-commerce.
Total company gross margin of 55.4% for fiscal twenty-three compared to last year's adjusted gross margin of 57, 3% with.
With the change attributable to cost increases, partially offset by pricing actions across our portfolio, which offset the dollar amount of inflationary cause headwinds.
For fiscal twenty-four we anticipate a similar focus to fiscal twenty-three, where we have and will continue to institute pricing actions and cost saving measures across our portfolio to offset the dollar amount of inflationary headwind.
In aggregate, we anticipate gross margin flat to up slightly versus fiscal twenty-three with Q1 estimated to be approximately 55%.
Advertising and marketing came in at approximately 13% as a percent of revenue for the fiscal year is expected owing primarily to the timing of initiatives and reduce spending around certain categories due to strong consumer demand.
For fiscal twenty-four, we'd anticipate and A&M rate of just over 13% of sales and up in dollars versus the prior year.
G&A expenses were 95% of sales in fiscal 2003.
For fiscal twenty-four we anticipate G&A to decline slightly in dollars versus the prior year.
Adjusted diluted earnings per share for the full year of $4.21 Gruber.
Grew about 4% versus the prior year.
Sales growth and disciplined cost saving efforts helped offset the impact of cost increases and rising interest rates.
Below the line for fiscal 24, we'd anticipate a normalised tax rate of approximately 24%.
And interest expense of $67 million, including 18 million of interest in Q1.
Although the magnitude of increases in variable interest rate targets have begun to Stabilise, we will continue to face higher year over year rates through the first half of our fiscal year before beginning to see the effects of a more stable rate environment as well as lower variable interest rate exposure from our ongoing debt reduction efforts.
Last adjusted results on this page exclude the impact of $281 million net of tax non-cash goodwill and intangible impairments primarily related to the company's summer's Eve <unk> and Thera Tears brand names.
The charge resulted from our annual evaluation assessment, which was affected by a significantly higher discount rate applied to future cash flows versus the prior year.
As a reminder, accounting rules do not right up to the value of brands that have a fair value that exceeds book value.
Most importantly, please note these adjustments have no impact on our long term outlook for the company as a whole.
Now, let's turn to slide 14 to discuss cash flow.
For the full year fiscal twenty-three, we generate a $222 million in free cash flow as expected.
It previously discussed with strategically invest it behind inventory in light of the current supply chain environment, finding opportunities to increase inventory to better support targeted service levels.
Are stable EBIT margin and strong cash flow enabled us to invest behind our brands, while continuing to reduce leverage for the year and complete a $50 million share repurchase effort.
We finished physical twenty-three at 3.3 times leverage with approximately 75% of our debt fixed and know maturity's until 2028.
For fiscal 24, we anticipate on more Normalised free cash flow profile of at least $240 million in free cash flow and anticipate achieving around 2.7 times leverage.
As shown on the right side of the page. This cast generation is underpinned by our leading attribute that enable our financial profile.
Our business model, where the vast majority of revenue is externally manufactured results in low capital expenditure of 1% to 2% of sales annually.
We are anticipating capex approximately 1% of sales in fiscal 2004.
Our products have strong margins driven by the characteristics of the categories. We participate in their importance to consumer self care and the highly regulated nature of OTC that creates high barriers to entry.
We have meaningful tax benefit from past acquisitions that result in a cash tax rate in the high teens.
And we also remained focused on profitability with continuous cost saving efforts that help us maintain our strong mid thirties EBIT margin profile.
The result of this model is clear we generate best in class and sustainable free cash flow and are free cash flow conversion remains strong.
This attractive profile gives us the ability to continue to deploy capital in multiple ways as shown on page 15.
As Ron highlighted earlier efficient and disciplined capital allocation is a critical third pillar to our business strategy balancing the use of our cash generation against various priorities of investing in our brands deleveraging M&A and share repurchases.
Thanks to our leading cash flow profile and successful long term business growth, we know anticipate to operate at longterm leverage of less than three times.
We have confidence in our ability to achieve this lower level leverage objective, while still investing behind strategic uses of capital that are shown on the page.
Although the pieces of capital such as strategic M&A opportunities may cause us to temporarily operate above this threshold objective. We anticipate are strong cash flows to bring us back to target levels rapidly.
As a result, we continue to expect disciplined M&A. Another cash uses to remain an important part of our strategy to adding shareholder value while remaining cognizant of this revised leveraged target with that I'll turn it back around.
Thanks, Chris.
As we move forward into our next fiscal year, we are confident in our business attribute that leave us well positioned for future growth.
It's a proven business model that delivered value creation throughout disrupted environments.
To a variety of attribute.
Our brands are trusted and diverse which gives us the ability to limit the impact from any individual category slowdowns.
This diversity stretches beyond just brands, but into diversity of channels geographies and suppliers, each of which benefits our business and periods of uncertainty and volatility.
This enables us to leverage our proven brand building strategy opportunistically that grows categories and as a byproduct our brands.
Are superior financial profile has generated consistent and increasing cash flows over the long term and.
And finally, the model continues to be scalable, we have the right resources to continue our disciplined capital deployment playbook, while reinforcing investments and our existing business.
Now, let's flip to the next slide to discuss our physical plenty for financial outlook.
For fiscal 24 building off a very strong prior year, we anticipate revenues of $1 billion $135 million to $1 billion 140 million and organic revenue growth of approximately 1% to 2% versus fiscal 2003.
Or organic revenue growth of 2% to 3% after.
After excluding the planned strategic exit of non-core private label business that we have historically operated as a service for certain retailers.
Q1 revenues are anticipated to be approximately $278 million up slightly from the prior year.
We anticipate EPS of $4.27 to $4.32 for fiscal 2004 rigs.
Regarding EPS our outlook for fiscal 2004 reflects that continued temporary impact of higher interest rates that accounts for an over two percentage point headwind to earnings.
Thanks to our disciplined P&L management. This is more than offset by efficient brand building and cost management efforts, leading to our outlook for earnings growth at a faster rate than sales growth.
For Q1, we expect EPS of approximately a dollar one.
Lastly, we expect solid free cash flows of $240 million or more than physical 24.
This will enable the mindful approach to capital deployment Optionality, Chris discussed.
We've announced a $25 million share buyback plan today and plan to reduce leverage to below three times during the fiscal year, while continuing to invest in our brands to ensure long term success.
Our company has a track record of value creation and these anticipated uses of cash will help reinforce that.
With that will now open the lines up for questions operator.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you'll need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press.
Star One one again, please stand by while we compile the Q&A roster.
Our first question comes from Susan Anderson at Canaccord to new it is C. As in your lineup.
Thank you a nice job on the corner.
I was wondering if maybe you could talk to give a little bit of color on the gross margin puts and takes their for the fourth quarter and then how we should think about it for this year and then also any cadences throughout the different quarters.
Yeah. Good morning, Susan This is Chris so for queue for as anticipated.
Inflationary pressures and distribution costs were just over 150 basis point headwind year over year for us but.
But our pricing and cost saving efforts offset the dollar impact of that dollar for dollar so impacted the margin obviously, but the dollar impact with negligible and then we had a little bit of unfavorable mix.
In the quarter when we guide Q1 of fiscal 24 to about 55% guided the year to flat to up slightly.
Calling for some additional inflationary pressures in physical twenty-four, but again, we expect cost savings and.
In pricing actions to offset those dollar for dollar in fiscal 24, as well so a little bit of a negative margin impact from that but additional cost savings enable us to call the margin flat to up slightly.
So we expect some sequential gross margin improvement from the 55 in the first quarter as a reminder.
Laser focused on managing our EBIT margin right. So as we continue to progress on our March towards more normalized gross margins, we would look to invest that back into different levels of A&M and maintain our EBITDA margins in the mid thirties.
Okay, Great. That's really helpful and then on the international business it looks like it even picked up sequentially often very strong number. It says here I'm, assuming that's all Hydrolyte I guess is that new products or just continued growing demand for the brand in Australia and then just curious on your thoughts in the U S.
I know you guys don't have rights to the brand here, but is there maybe potential opportunity here. It seems like the hydrating beverages are kind of picking up steam here and challenging Gatorade. So just wanted to get your thoughts there.
Yeah. Good morning, Susan So first of all really.
Growth across the international portfolio, not only the Hydrolyte business day care business in Australia, but the small business that we have in Europe as well.
Have all been firing on all cylinders over the last couple of years, So primarily hydrolyte drives the big dollar move because it's the majority.
Of the sales, but really the international business system growing well there. After 24, we continue to expect strong growth more in law line with our long term outlook in the mid to high single digits.
International business. After a couple of record years, but we continue to feel good about the momentum or that business in total in terms of the U S. We've got a lot of other opportunities to focus on across our portfolio. When we had the slide in our prepared remarks today that showed the success we've had.
Broadly across the portfolio over the last three years. So we're really focused on continuing to support that momentum so that.
Hydration market in North America, really isn't something we've got on the agenda.
Great and then just one last one on the women's business. How are you thinking about that for this year I guess do you expect it to normalize after kind of stabilizing off of those COVID-19 numbers and I guess is it still consumers gets not returning to the Doctor's office or do you think you know they've kind of.
Gotten back to their normal routine Sam thanks.
Interestingly as we sit here today and look back over the last three years, excluding cost Cole the women's health category is the one that seems to have had been most impacted and impacted the longest during this disrupted period not only were shopping habits impacted.
But kind of the underlying usage occasions, as we've talked about I think the last quarter as well, but as we sit here today for fiscal 2004, we expect our women's health.
Businesses, both summers Eva monistat to get back to growth.
For fiscal 2004, and we continue to feel good about their long term.
Growth opportunity so despite those two franchises being disrupted over the last couple of years, we continue to feel good about their leading positions.
Great if I could just maybe follow up really click on it so it sounds like compound W. As strong in the quarter. If you could just remind us what is this the first corner, where you saw that strength also come back.
One moment for our next question.
Our next question comes from Mitchell Pinero, what sort of account Mitchell you are life.
I was curious from an A&M spend.
On it and if he said this I apologize sort of the the sequence throughout the year, whether there's any unusual timing.
And then second what you're you intend to focus D. A N M spending on.
Yeah, maybe I'll I'll take the first part of that which is as you know.
Our A&M plans are built from the ground up with our marketers and various initiatives. So as we saw it and this year. The cadence was shifted waited more towards the first half of the year based on certain new product launches in various marketing initiatives as we look to physical 24, we would expect that to be spread more evenly throughout the year.
And Mitch in terms of your questions around where where our focus is going to be it's going to continue to be around our largest brands or power core brands will continue to get.
Investments above the company average and then as we have historically.
Pulse investments to different core brands.
Again another comment.
A bit and quite a bit from quarter to quarter.
But we continue to build our plans up from the bottoms up based on our brand opportunities.
And like any good CPG company, we talked about always wanting to invest more for the long term support of our brands, but we feel good about where we've been investing and how we're set up to support growth longterm and specifically for fiscal 2004.
To that end also will there be any do you intend to launch any any new line extensions.
<unk> 24.
Yeah, we'll have.
A stream of some new products out in 24 like we do every year.
Don't talk about them are ahead of them showing up at retail, but again, new product development and innovation pipeline is an important part of what we do here to make sure. We've got a funnel of things coming in and in in this space. It takes time to get things to market. So it's more of the same for us which is always starting with consumer.
We're insights to understand where the opportunities are and then getting them out to market and I think compound W and dramamine or two great. Examples of the long term success of bringing out a steady pipeline of new products in the last year. It's also been true for summers Eve or we've had the spa launch then.
Okay, and then just one last question on and revenue but.
Look at the private label exit is it sort of evenly is it is it the first three quarters and then you're left some of it in the fourth quarter.
And then on the <unk> on the foreign currency headwind I don't know if you set it but what what what what type of head when do we expect this year.
For the whole year, but for the most part Christian would take the effects sure. So F X is expected to be a headwind for the year of about $2 million you know our our.
Our exposure is largely around the Australian and Canadian dollars in Australia, and in particular really swung in physical twenty-three. So we're actually going to have some tail some headwinds unfavorability from F X in the first half and then we expect it to shift to to favor ability.
In the back half.
But netting out to about $10 million a year.
Got it.
Right. Thank you much I appreciate it.
Thanks, so much.
Our next question comes from John Anderson with William Blair, John You are alive.
Good morning, everybody.
Hi, John .
I was wondering.
It looks like in the fourth quarter.
B E shipped perhaps in North America shipped uhm.
Ahead of consumption at least.
The consumption.
That we can see through syndicated data.
Well.
Is that the case and if so what were some of the dynamics.
That caused that.
And I was wondering if you could.
<unk> give us your.
Your perspective on kind of all channel consumption, both for the fourth quarter and the full year.
So for for starters right those generic consumption poor should get are missing a whole bunch of our fastest growing <unk>.
It wasn't too far ahead with the exception that the inventory investments that we made back in the third quarter allowed us to begin to catch up on some of the categories like cost cold, where we had been kind of go hand to mouth.
That makes sense and input with respect to that point done kind of catch up because I know you have as others have been trying to catch up in certain categories.
Having kind of a.
Yeah. So for the most part I think inventory of retail is in good shape, a little bit of catch up and cough cold still to come for US again in particular, we added liquid cloth capacity in Q3.
Or tailwind in total for the whole year.
Just wanted to make sure I understand you'll give given the.
Kind of gross margin trend and and the the absolute gross margin right in the in the fourth quarter.
How we kind of get back to.
You don't percent or excuse me, how how we kind of flat to up year over year.
What's coming that.
You know is going to drive.
A reversal in the tread.
More towards gross margin expansion.
And it will be some price, but it's really going to be more cost savings.
Through new products at incremental gross margins and other programs over time and again as Christmas.
Manage are consistent EBIT margins around 34%.
And we will step off of that over over time as we recover back to 58 per cent John .
You mentioned.
Does that mean.
You're going to be less likely or or aggressive on the.
Mmm.